Chapter Twenty-Five Monopoly Behavior. How Should a Monopoly Price? u So far a monopoly has been thought of as a firm which has to sell its product at.

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Presentation on theme: "Chapter Twenty-Five Monopoly Behavior. How Should a Monopoly Price? u So far a monopoly has been thought of as a firm which has to sell its product at."— Presentation transcript:

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How Should a Monopoly Price? u So far a monopoly has been thought of as a firm which has to sell its product at the same price to every customer. This is uniform pricing. u Can price-discrimination earn a monopoly higher profits?

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Types of Price Discrimination u 1st-degree: Each output unit is sold at a different price. Prices may differ across buyers. u 2nd-degree: The price paid by a buyer can vary with the quantity demanded by the buyer. But all customers face the same price schedule. E.g. bulk-buying discounts.

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Types of Price Discrimination u 3rd-degree: Price paid by buyers in a given group is the same for all units purchased. But price may differ across buyer groups. E.g., senior citizen and student discounts vs. no discounts for middle-aged persons.

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First-degree Price Discrimination u Each output unit is sold at a different price. Price may differ across buyers. u It requires that the monopolist can discover the buyer with the highest valuation of its product, the buyer with the next highest valuation, and so on.

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First-degree Price Discrimination u First-degree price discrimination gives a monopolist all of the possible gains-to-trade, leaves the buyers with zero surplus, and supplies the efficient amount of output.

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Third-degree Price Discrimination u Price paid by buyers in a given group is the same for all units purchased. But price may differ across buyer groups.

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Third-degree Price Discrimination u A monopolist manipulates market price by altering the quantity of product supplied to that market. u So the question What discriminatory prices will the monopolist set, one for each group? is really the question How many units of product will the monopolist supply to each group?

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Two-Part Tariffs u Should a monopolist prefer a two- part tariff to uniform pricing, or to any of the price-discrimination schemes discussed so far? u If so, how should the monopolist design its two-part tariff?

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Two-Part Tariffs u p 1 + p 2 x u Q: What is the largest that p 1 can be? u A: p 1 is the entrance fee so the largest it can be is the surplus the buyer gains from entering the market. u Set p 1 = CS and now ask what should be p 2 ?